ABOUT SEAN STANNARD-STOCKTON

Sean Stannard-Stockton is the president and chief investment officer of Ensemble Capital Management, located in Burlingame, CA, midway between San Francisco and Silicon Valley. From 2006 through 2012, Sean authored the Tactical Philanthropy blog and wrote regular philanthropy columns for both the Financial Times and the Chronicle of Philanthropy. In 2012, Sean officially ended the blog to focus on growing Ensemble Capital.

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External vs Internal Leverage in Philanthropy

October 21, 2010 – 10:21 am

People in philanthropy love to talk about using “leverage”. Leverage refers to finding ways to make actions create bigger results. The word leverage comes from the word lever, a simple mechanical tool that allows a force applied at one end to be magnified at the other end.

In their excellent report What’s Next for Philanthropy, the Monitor Institute argues that philanthropy needs to “act bigger”, which I find to be a far more evocative phrase than simple seeking leverage.

The report offers five keys to acting bigger:

UNDERSTAND THE CONTEXT. Philanthropists are just one part of a larger ecosystem of actors, and in almost all cases they will need to engage many different stakeholders if they hope to address today’s pressing social and environmental challenges.

PICK THE RIGHT TOOL(S) FOR THE JOB. Funders have a wide range of assets—money, knowledge, networks, expertise, and influence— that can be deliberately applied to create social change.

ALIGN INDEPENDENT ACTION. Coordinating resources toward common goals no longer must mean developing a consensus based collaborative. Funders are forging new ways of working together, from learning groups to strategic alignment networks, that fit different purposes and circumstances, allowing individual funders to aggregate and amass resources of all kinds and effectively “punch above their weight.”

ACTIVATE NETWORKS. Although the individual grant is the typical unit of analysis for most foundations, the success of any grant or organization is rarely sufficient to move the needle on a complex problem. Advances in network theory and practice now allow funders to be much more deliberate about supporting and participating in networks and in thinking about how the collective impact of a coordinated portfolio of grants can produce more significant change.

LEVERAGE OTHERS’ RESOURCES. In addition to finding new ways of working together toward collective goals, some funders are also exploring how they can use their independent resources as levers to catalyze much larger streams of funding and activity from other sources.

I think these are all good recommendations.But also I think that they are focusing on what might be called “internal leverage”. I wonder if there might be significantly more power in what might be called “external leverage”.

Internal leverage are steps taken to increase the targeted impact of a grantmakers own grants. One example would be the practice of venture philanthropy, where the funder provides significant non-monetary support to their grantees.

External leverage are steps taken to increase system wide impact through influencing others. One example might be GiveWell, which publishes detailed analysis of nonprofits and recommends a select few organizations with the hope that other donors/funders will support these organizations.

A critical distinction between the two approaches is the degree to which the results of the leverage can be measured. Because internal leverage hopes to enhance the impact of targeted activities, a donor can strive to understand how their efforts to use leverage improved results beyond what would have happened if they had simply made a grant. While measuring results of any kind is often difficult, internal leverage simply tries to create more/bigger results of the same kind that are sought by a non-leveraged grant.

External leverage on the other hand adds fuels to all sorts of fires in ways that might be unknowable. GiveWell, for instance, tries hard to track how much money is influenced by their work. For example, they ask donors to tell their recommended nonprofits if they make a grant based on their research. But not only is it certain that GiveWell is influencing grants that they never hear about, GiveWell is also creating impact through helping change the way people think about giving.

I believe that in many cases, external leverage is FAR more powerful than internal leverage. But internal leverage is far more measurable. We can see this dynamic at work in Warren Buffett’s gift to the the Gates Foundation. The internal leverage (Buffett’s utilization of the Gates Foundation’s resources to distribute his giving) is significant. But as I’ve argued many times, the big impact of Buffett’s gift is the external leverage generated through the richest people in America modeling a changing attitude to philanthropy.

External leverage is fundamentally underappreciated by philanthropy. We see this dynamic at work in the minuscule amount of foundation grants made to support improving the philanthropy of individuals (even though individuals give 6.6 times the amount that foundations give each year). While grants made to support the philanthropy of individuals are highly leveraged and can help move significant sums of philanthropic capital, the impact is seen throughout the system rather than within a target defined by a single grantmaker.

The Monitor report makes another very important point. It argues that philanthropy must get comfortable with the “creative tensions” that exist between different types of valid goals.

If external leverage truly is more powerful than internal leverage, then philanthropy might need to get comfortable with the creative tension between measuring impact and maximizing impact.

2 Comments

Thanks for the provocative commentary on the report Sean. We couldn’t agree with you more about the importance and power of leverage. In the coming years, we believe that the most effective funders will increasingly be able to leverage outsized impact and trigger resources that are far larger than their own, whether it’s by influencing other funders (institutional or individual), catalyzing government support, mobilizing public will and opinion, or stimulating markets to sustainably provide services.

GiveWell and its efforts to use its due diligence to guide and leverage additional resources is definitely a great example of this. And we’ve cited numerous other cases in the What’s Next report, such as the Women Moving Millions campaign, where the daughters of oil magnate H.L. Hunt decided to use their giving not just to directly support the advancement of women, but to start a global campaign in partnership with the Women’s Funding Network that aims to break the trend of female donors giving only small amounts to women’s causes. From what they’ve been able to track, the effort has rallied more than 100 women to give upwards of $1 million each, and has raised more than $181 million for women’s funds around the world.

But I wonder, though, whether the main distinction you are really highlighting is less about “internal” versus “external” leverage (many of the examples of Acting Bigger from our report—especially in the section on “Leveraging Others’ Resources”—are primarily about influencing the flow of external resources, after all), as much as it’s about “direct” and “indirect” impact.

And in that respect, your point remains a powerful one. In the end, the greatest impact of the Women Moving Millions campaign, for example, may not be in exactly how many dollars the initial gift ends up leveraging directly, but instead in how the effort raises awareness about women’s and girl’s issues and how it shifts the behaviors and attitudes of generations of women who are empowered and encouraged to give in the years to come.